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Why property funds dual-price

A week is a long time in fund management. Returning after a week’s holiday. I am met with a torrent of emails and press cuttings about investors “losing money” on property funds.

In fact, my first press call was on this very subject.

Of course, on closer examination, I found that fund managers were acting to protect continuing investors because of a potential need to sell assets to satisfy investors who were redeeming.

But, to begin, a bit of background. Property funds have become “the next big thing”, with investors piling in over the last few years.

Net retail sales of property funds since the start of 2005 have come in at over £6.5bn. 2005 sales of property funds represented just 10 per cent of all net retail sales in that year while in 2007, property fund sales of £2bn to date represent 34 per cent of all net retail sales.

These funds have dominated the specialist sector since February 2006, making it the most popular sector for retail investors since then.

There now seems to be a suggestion that the property sector is starting to slow down, with yields on commercial prop-erty declining to single figures, but we have yet to see evidence of a drop in sales.

Property funds are set up as dual-priced rather than singlepriced because it is considered a better investor protection measure against dealing costs when a fund experiences big purchases or redemptions.

It is obvious that property funds with net redemptions caused by more money going out than coming in are faced with the situation that they might have to sell assets in an illiquid market and do so quickly and at a lower than market price in order to meet the needs of investors seeking to redeem.

In order to try and alleviate the negative effects of this on continuing investors who choose to remain invested, such funds may opt to trade at the lower bid price.

This has the effect of passing on the costs of liquidating assets to those investors leaving the fund. It should hopefully also act as a deterrent and prevent further investors from selling up.

Not to move from offer to bid pricing would have the effect of disadvantaging continuing long-term investors.

If the fund continued to trade at the higher offer price, it would still have to pay the costs associated with liquidating property assets – stamp duty, legal fees and VAT, potentially adding up to over 5 per cent – which would have to be borne by the fund and therefore dilute its value for continuing investors.

But it would be wrong to suggest that this is an action taken by the fund manager in isolation and there is no benefit to the manager.

The trustee, acting on behalf of the unitholders must be informed and give consent to the new pricing mechanism and, crucially, require it to be changed back as and when circumstances change.

So, faced with the fund having to pay the associated costs of selling assets or protecting continuing investors, the choice is clear.

Mona Patel is head of communications at the Investment Management Association

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